House prices tumble in rural areas as supply outstrips demand

An increasing imbalance between supply and demand in German rural communities is decimating the market, causing a dramatic fall in prices, according to new research from the Cologne Institute for Economic Research (IW) and the German Institute for Economic Research (DIW Berlin).

Between 2011 and 2015, around 20% of homes built in German rural districts were surplus to demand, according to the IW. Single-home properties were overbuilt to twice the degree. In Emsland, for example, more than 1,000 apartments built in the period were surplus to requirements.

Subsequently, priced are starting to tumble. It is estimated that prices for apartments will fall by more than 25% in a third of rural areas by 2030, according the DIW Berlin. The price of single family home and duplexes is expected to fall by more than 25% in around 100 of Germany’s 402 rural districts and municaplities. Areas that are expected to be particularly badly hit include Brandenburg, Sachsen, Sachsen-Anhalt and Mecklenburg-Vorpommern, according to the DIW.

‘The demand for housing in the country is falling, so we expect to see a significant number of abandoned properties in the future,’ said Björn Seipelt, an economist at the IW. ‘For those looking to sell in such areas, it will likely get a lot harder,’ he added.

Younger people are deserting rural communities in droves, preferring to migrate to bigger cities in search of better job opportunities. As a result, the oversupply in Germany’s rural communities comes in stark contrast to the dire undersupply facing its seven biggest cities, where in the same period only 32% of the homes needed were actually built. The German population is forecast to shrink by 2.1 million between 2015 and 2030, which is also exacerbating the two-speed housing market.

‘According to our calculations, prices will develop very different regional patterns,’ said Dr. Markus Grabka, a research associate on the Socio-Economic Panel (SOEP) at DIW Berlin. ‘We presume that in Germany’s rural regions aging and depopulation will have a significant impact. In regions such as Saxony-Anhalt, for example, residential real estate prices will plummet in affected rural districts. At the same time, residential real estate prices in regions with population growth—mainly in large cities—will probably rise slightly.’

And although the housing market in rural areas is looking decidedly shaky, those lucky enough to own their own home in a bigger city have witnessed major gains in recent years: house prices in 127 German cities have risen by almost 50% since 2010, according to the Bundesbank. In Germany’s ‘Big 7’, including Berlin and Munich, prices in the period have leaped by 60%.

However, in struggling rural areas, it could not be more different. Subsequently, the IW recommends not creating new building sites in rural areas but, rather tearing down older properties, if necessary, to rebuild on existing sites, Seipelt said.

Like in most other countries, owner-occupied real estate is still the most important component of wealth, so as the two-speed market deepens, so will the inequality it creates, according to Grabka at the DIW: ‘Due to the increasing polarization of residential real estate prices, the inequality associated with this component of wealth will increase. Overall and for purely demographic reasons, this will probably lead to a slight increase in inequality in wealth in Germany between now and 2030.’